Status
of Regulations |
Overview of
Cap-and-Trade Regulation |
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Overview of Reporting
Regulation
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Legal Authority
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- Both the Regulation and the Reporting Regulation are authorized
by the Climate Change Mitigation and Low-carbon
Economy Act (Bill 172), which was passed by the
legislature on May 18, 2016.
- Bill 172 sets out provisions relating to two main areas: (1)
emissions reduction targets and action plans, and (2) cap-and-trade
program and use of proceeds.
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Start Date and Compliance
Periods
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- The cap-and-trade program will take effect as of January 1,
2017 with the first compliance period ending December 31, 2020.
Thereafter, compliance periods will last three years (i.e. starting
January 1, 2021 until December 31, 2023, and so on).
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Regulation
Coverage |
Threshold of
Coverage |
- Sources that emit ≥25,000 tonnes of CO2e/year are
subject to the cap-and-trade program.
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Voluntary and Market
Participants
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- In addition to mandatory participants, the Regulation contains
provisions for voluntary participants and market participants.
- A facility with annual emissions of between 10,000 and 25,000
tonnes that is obliged to report emissions under the Reporting
Regulation may opt-in to the cap-and-trade program as a voluntary
participant. This approach allows companies with smaller emissions
profiles to participate on the same basis as larger emitters in the
same sector, including access to free allocation of
allowances.
- A person who is not an employee of a mandatory or voluntary
participant in the cap-and-trade program may apply to register as a
market participant.
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GHGs Covered
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The following greenhouse gases are covered by the
program:
- carbon dioxide;
- methane;
- nitrous oxide;
- hydrofluorocarbons;
- perfluorocarbons;
- sulphur hexafluoride;
- nitrogen trifluoride;
and such other contaminants as may be prescribed as a greenhouse
gas by the regulations.
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Sectors Covered |
- All activities set out in Table 2 of the Reporting Regulation
that are engaged in at a single facility (i.e. the large
industrial emitters).
- Electricity importation.
- Natural gas distribution.
- Petroleum product supply.
The cap-and-trade program will cover approximately 82% of the
Ontario's total GHG emissions.
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Point of Regulation
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- Industrial and institutional sources with
annual GHG emissions ≥25,000 tonnes: at the point of emission
(i.e. at the facility).
- Domestic electricity generation: at the fuel
distributor level.
- Electricity imports: at the point the
electricity enters the province (first jurisdictional
deliverer).
- Transportation fuels (including fuel oil and
propane): at the distribution level where they are first placed
into the market; imports and domestics covered at volumes of 200
litres or more and that are delivered to an Ontario consumer.
- Distribution of natural gas: for distributors
of natural gas that, in aggregate, is associated with annual GHG
emissions ≥25,000 tonnes, the point of regulation would be at
the point the gas is transferred from pipeline into the
distribution network for local customers.
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Allocation of
Allowances |
Creation of Emission
Allowances
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- Section 54 of the Regulation provides that on or before January
1, 2017, the Minister shall create the following emission
allowances:
- 142,332,000 Ontario emission allowances for 2017.
- 136,440,000 Ontario emission allowances for 2018.
- 130,556,000 Ontario emission allowances for 2019.
- 124,668,000 Ontario emission allowances for 2020.
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Overview of Methodology for
Distribution of Free Allowances
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- The Methodology for the Distribution of Ontario
Emission Allowances Free of Charge (the Methodology) is
incorporated by reference into the Regulation and will come into
effect on July 1, 2016.
- Application eligibility requirements for free allowances is set
out in section 85 of the Regulation.
- The applicant is required to collect and quantify the
information that is required in respect of an application under s.
86 of the Regulation, using methods that are consistent with the
Guideline (under the Reporting Regulation) and the requirements
about those methods in the Reporting Regulation, where the
information is not otherwise required to be reported in a 2015 EPA
Report, a 2016 EPA Report or a report under the Reporting
Regulation (as such terms are defined in the Regulation). The
application form that will be available from the Ministry of
Environment and Climate Change (MOECC) will provide direction to
potential eligible applicants in respect of the methods in the
document.
- According to the MOECC, the following aspects
of the cap-and-trade program were changed following stakeholder
consultations:
- Treatment of the electricity component of cogeneration:
Facilities that generate electricity and steam via cogeneration for
use on-site will receive allowances free of charge for emissions
attributable to the electricity generation and the steam
generation, to remove disincentives for cogeneration and simplify
implementation.
- Allocation changes for some industries subject to energy use
benchmarks: To encourage energy efficiency improvements, some
industries and facilities will be subject to historical or
product-output benchmarks instead of energy-use based
allocations.
- Biomass use: A factor was added to the allowance allocation
formula that would lower the cap adjustment factor in proportion to
any facility's biomass use, so that facilities using more
biomass would see more moderate rate of decline.
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Distribution Method
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- Emitters covered under the program must hold an allowance for
every tonne of greenhouse gas emissions released.
- As the cap declines each year, emitters will need to hold a
sufficient number of allowances to cover their annual emissions. To
comply, emitters can reduce their emissions or purchase allowances
in the carbon market.
- Allowances will be distributed through auctions and
free-of-charge allocation to industry.
- Emissions attributable to electricity generation would not be
eligible for free allocation of allowances, but emissions due to
intensive production of a trade exposed good will be eligible.
- Free allocation amounts will decline over time. The timing for
the decline will be determined before the end of the first
compliance period as part of a program review. The proportion of
free allowances will decline as other jurisdictions adopt carbon
policies, Ontario entities transition to the carbon price, and
border carbon adjustments are introduced.
- The remaining allowances (i.e. those not distributed
free-of-charge) will be sold at auction.
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Allocation
Methodology
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- Generally, facility allocations will be determined primarily by
three factors and calculated based on the equations set out in the
Regulation. The three factors include the following:
- Assistance Factor (up to 100%); certain
emissions intensive and trade exposed industries will receive a
higher assistance factor.
- Base amount for facility, determined according
to product-output benchmarks (based on allowances
per unit of output), energy use (based on
allowances per GJ of energy used) or historical
emissions.
- Cap Adjustment Factor (reflects annual
reduction in the cap)
- The Methodology sets out five methods that will be used by
MOECC to determine the number of Ontario emission allowances that
will be distributed free of charge to eligible capped participants:
- Method A: Product Output Benchmark Method –
examples of sectors/facilities eligible for allocation based on
product-output benchmarks include: iron and steel making; petroleum
refining; grey cement manufacturing; hydrogen manufacturing; and
beer manufacturing.
- Method B: Energy Use Based Method – eligibility
requirements under this category are based on exclusions set out
the Appendix to the Regulation; facilities that use energy in
certain processes, operations or activities are not eligible for
this type of allocation.
- Method C: History Based Method – examples of
sectors/facilities eligible for allocation based on historical
emissions include: white cement manufacturing; glass manufacturing;
ammonia manufacturing; nitric acid manufacturing; carbon black
manufacturing; ethylene manufacturing; lubricant manufacturing;
styrene manufacturing; magnesium production; high calcium lime
production; dolomite lime production; mining, base metal smelting,
refining; brick making; and mineral wool insulation
manufacturing.
- Method D: Direct Method – direct allocations
will be made to certain participants (as set out in the
Methodology) including: Carmeuse Lime Canada; Terra International
(Canada) Inc.; University of Toronto; University of Western
Ontario; University of Guelph; York University; London Health
Sciences Centre; Hamilton Health Sciences Corporation; Queen's
University; Emerald Energy From Waste Inc; and Clean Harbors Canada
Inc.; and
- Method E: Indirect Useful Thermal Energy Method
– eligible capped participants will receive free allowances
in respect of useful thermal energy that is used at a facility but
generated at another facility (i.e. indirect useful thermal
energy); however Method E does not apply to a facility that
receives and uses useful thermal energy from another facility that
is eligible to receive Ontario emission allowances under another
method for that useful thermal energy.
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Auctions
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- Quarterly auctions – initially separate; joint auctions
once the program is officially linked to Québec and
California.
- Sealed bid, single round, lots sizes of 1,000 allowances,
uniform price.
- First auction: March 2017 stand-alone auction (to be aligned
with Québec and California's schedule where auctions are
currently held every quarter).
- Participants must provide financial guarantee covering full
value of any bid.
A summary of the results of the May 2016 Quebec-California
auction is available online.
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Price Stability
Mechanisms
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Auction Reserve Price
- Ontario will align its reserve price with the price in the
joint Quebec-California market for 2017. The 2016 reserve price in Quebec and California
was CAD $12.82 and US $12.73 respectively.
Strategic Reserve
- 5% of total allowances from the cap each year will be set aside
by the province in a strategic reserve and made available to
Ontario emitters at fixed prices to manage price impacts in the
event there is high demand for allowances.
- Ontario plans to align its price tiers with the price in the
joint Quebec-California market for 2017. For Quebec and California,
these price tiers were set at $40, $45 and $50 per allowance in
2013, escalating annually at 5% plus inflation and converted to
Canadian currency.
- Only covered entities can purchases allowances from reserve and
allowances can only be used for compliance.
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Early Reduction
Credits
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- Early Reduction Credits will only be awarded for reductions of
eligible emissions during the reduction period between January 1,
2012 and December 31, 2015.
- Eligibility criteria and calculation methods for early
reduction credits, which were discussed in the Appendix to the
draft Regulation, will be finalized later in 2016.
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Market Rules
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- A holding limit will apply to any registered entity, which will
depend on supply of allowances in the market.
- A purchase limit prevents covered entities from purchasing more
than 25% of allowances sold at auction; for non-covered entities
the limit is 4%.
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Market
Flexibility |
Banking
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- Purchasers and covered entities would be allowed to bank
allowances, without restrictions on the amount of allowances that
may be banked or on how long they may be banked (subject to holding
limit).
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Borrowing
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- Borrowing of allowances from future compliance periods will not
be allowed (with possible exception for complying with penalty
rule).
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Offsets
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- Ontario intends to allow the use of offsets for compliance in
its program, and to take account of protocols for project types
currently accepted in Quebec and California. Regulatory
requirements for offsets will be released later in 2016.
- Ontario plans to:
- establish an Offset Credit Registry;
- issue offset credits for emissions reductions and removals from
eligible projects within Canada;
- allow for the aggregation of projects (bundling of identical
projects for reporting purposes);
- recognize offset credits issued by California and Quebec, in
anticipation of linking to Ontario's program; and
- limit use of offsets to up to 8% of the total compliance
obligation.
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Compliance Period
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- Initial four year compliance period to allow harmonization in a
linked program with Quebec and California's compliance periods.
Subsequent compliance periods will be three years.
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Emissions Reporting and
Verification |
Reporting
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- Capped participants must report annually under the Reporting
Regulation (as required since 2010).
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Registration
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- All participants must register with MOECC to participate in
allowance trading market.
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Verification
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- Third party verification is required for sources emitting
≥25,000 tonnes per year, or exceeds another verification
threshold listed in the Reporting Regulation.
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Compliance and
Enforcement |
Compliance Period
Obligation
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- Following a compliance period, all entities with a compliance
obligation must surrender a number of compliance units (e.g.
allowances, offset credits) equal to their emissions during the
period. This process is commonly referred to as a true-up.
- Acceptable compliance units for true-up include emission
allowances, strategic reserve allowances, early reduction credits
and offset credits issued by Ontario.
- For entities with a compliance obligation, the requisite number
of compliance units from each entity's compliance account will
be placed into a retirement account and retired.
- Any entity participating in the cap-and-trade market (including
voluntary participants) may choose to voluntarily retire allowances
or offset credits to benefit the environment.
- An entity will be permitted to use offset credits for up to 8%
of its total compliance obligation for each compliance period.
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Penalty for
Non-Compliance
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- An entity with excess emissions will be subject to a
three-to-one compliance penalty where an additional three
allowances for each allowance short at true-up is required, plus
the allowance originally owed (meaning that four allowances must be
surrendered for every tonne not covered in time).
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Enforcement
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- Enforcement measures for the cap-and-trade program are aligned
with those measures set out in the Quebec and California
cap-and-trade programs.
- Potential fines for non-compliance with the Act or related
regulations range from minimum fines set at $5,000 and $25,000 to
maximums as high as $4 million and $6M million for individuals and
corporations, respectively, on first convictions. The Act also
allows for the issuance of administrative monetary penalties, which
are similar to the environmental penalties that can be issued under
the Ontario Environmental Protection Act and the
Ontario Water Resources Act. Additional rules for
administrative monetary penalties will be posted later in
2016.
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Linking |
Western Climate
Initiative
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- Ontario intends to link its proposed cap-and-trade program with
the existing programs in Quebec and California, which will likely
occur in 2018.
- Ontario will propose any necessary amendments to the
regulations to facilitate linking of the Ontario program with the
programs of Quebec and California once linking agreements are in
place (Quebec and California are currently parties to a linking agreement for their joint program).
These amendments would include:
- recognition of allowances and credits from Quebec and
California;
- adjustment of the holding limits and purchase limits to account
for the size of the linked markets; and
- currency adjustments related to the auction.
- Manitoba has indicated that it plans to join the linked program
as well.
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